Do you really need to put the full 20% down on a mortgage?


Mia Taylor

Mia Taylor

Blog author Mia Taylor

Mia Taylor is an award-winning journalist with two decades of reporting experience. News organizations she has worked for as a staff member or contributor include The Atlanta Journal-Constitution, Westways Magazine, Vacation Agent Magazine, the San Diego Union-Tribune and The Boston Globe. She has an M.A. in Journalism and Media Studies and was a member of a team of reporters who received a Walter Cronkite Award for Excellence in Journalism in 2011.

Published August 9, 2019 | 3 min read

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There’s a commonly-held belief that it’s best to make a 20% down payment on your mortgage when buying a home.

But it’s not always necessary to bring such a significant sum of money to the table. Oftentimes, there’s various mortgage options for those unable to save a full 20%.

Even if you are able to squirrel away that much money, it may not even make financial sense to put so much cash into the purchase. Here’s a guide to the advantages and drawbacks to paying a mortgage down payment less than 20%.

Times have changed

While a 20% down payment used to be the standard benchmark for those wishing to purchase a home, the mortgage landscape has evolved in recent years, said Ralph DiBugnara, president of Home Qualified.

“There are plenty of down payment assistance programs as well as low down payment options available that would not require a large deposit on your loan,” he said.

Here are a couple well-known alternatives if a 20% down payment isn’t an option for you. (And here’s what you shouldn’t do for a down payment.)

Fannie Mae & Freddie Mac Some of the most well-known alternatives for those unable to put 20% down on a home purchase are offered by Fannie Mae and Freddie Mac, said DiBugnara.

The various choices include the HomeReady mortgage program and the Home Possible mortgage. HomeReady, from Fannie Mae, is aimed at low-income borrowers and requires just 3% down. Freddie Mac’s Home Possible program also allows for down payments as little as 3%. As part of both programs, the down payment to come from a variety of sources, such as family members or employer assistance programs.

VA Loans VA loans are another well-known alternative for those hoping to skip the big down payment. These mortgages, designed for veterans and active duty military, offer no money down options for qualified borrowers.

The VA also allow applicants to skip obtaining private mortgage insurance, often a requirement for those putting less than 20% down. PMI can often make your monthly mortgage payment significantly costlier (more on this later).

While the vast majority of borrowers use VA loans with no down payment, there’s a notable benefit to putting down as little as 5%. Borrowers who put down more money reduce the overall cost of the loan over its lifetime and pay a smaller VA Funding Fee.

Here’s how to get a mortgage in 30 days.

Why you may not want to put 20% down (even if you can)

Draining your savings to buy a house is not an ideal scenario, said Michele Hammond, a private client home lending advisor at JPMorgan.

Without some free cash at your disposal, it will be much more difficult to handle the repairs and emergencies that arise with home-owning. (Here are some hidden costs of owning a home.)

“You should set money aside for unexpected circumstances or hardships that could come up,” said Hammond. “If you don’t have enough savings, I don’t advise putting 20% down.”

Potential consequences of a smaller down payment

One of the main drawbacks of bringing less money to the table for a home purchase is slightly higher interest rates and less favorable terms on your mortgage. You’ll also have to get private mortgage insurance.

As mentioned earlier, those who don’t have 20% for a down payment are required to sign-up for private mortgage insurance. The amount of private mortgage insurance you need depends on factors like the amount of the loan, program type and credit score, said Hammond.

“The home buyer really needs to take all of this into account when considering a loan that carries PMI,” she said.

One last drawback

If you purchase a home with a down payment less than 20% and you suddenly need to sell, you may not have enough equity in the property to pay all of the costs associated with the sale, said Hammond.

“In other words, when you put more money down you don’t worry as much about market fluctuations and the value of your home,” said Hammond. “When you put less money down you can lose all of the equity you have accumulated.”

Want to learn more? Try our mortgage calculator to see how much house you can afford.

Image: Nastia Kobzarenko